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Most Read: Keppel Corp, Cathay Pacific Airways, KE Holdings Inc and more

By | Daily Briefs, Most Read

In today’s briefing:

  • What Triggers a Temasek Decision on Keppel?
  • Temasek Walks Away from Keppel Deal
  • Smartkarma Webinar | Global Banks: Temperature Checks
  • Cathay Rights Results And Excess
  • KE Holdings/​​​Beike IPO – Can’t See Much Upside

What Triggers a Temasek Decision on Keppel?

By Travis Lundy

When most of us saw the results announcement for Keppel Corp (KEP SP) last week it was most likely a surprise. It is eminently possible that under the Offer, Temasek had pretty good information about what the numbers would be like prior to them being released. If not, then one would expect their advisors did and could advise them. 

When Temasek came out with their statement on August 3rd saying they had not yet decided whether to invoke or waive the pre-condition which was breached as a result of Keppel’s Q2 2020 earnings report, the only real clarification was that a decision would be made by 31 August 2020.

The question for investors has multiple layers. 

  • If this MAC breach would trigger withdrawal, why not announce right away?
  • If Temasek has decided not to withdraw immediately, and several days have passed, one assumes that Temasek’s decision is contingent on something else. The question is… what is that other thing?
  • And if we can identify that other thing, are there multiple possible outcomes? Or only two?

More discussion below, and a refresh of implied withdrawal likelihood charts.


Temasek Walks Away from Keppel Deal

By Travis Lundy

After nearly 10 months of work across many jurisdictions (and probably a dozen insights by yours truly in that period), Temasek has decided to walk away from the deal.

Today – a national holiday in Singapore – saw the announcement (SGX link) that Temasek would not proceed with the Partial Offer as the MAC Pre-Condition of no material adverse change (MAC) in the Group’s financial performance occur over the 12 months to the latest financial statements as of the time when the deal might go forward (and because the long stop appears to be before the next quarter’s earnings will be released, that means the Q2 earnings to 30 June 2020 were going to be the defining data set. 

After a week of no news on this, I had expected that the national holiday long weekend would have either seen such an announcement before the weekend, or it might wait on the Sembcorp Marine (SMM SP) shareholder vote, if there was a non-explicit condition to their eventual decision to do the deal. 

Over the weekend in What Triggers a Temasek Decision on Keppel? I argued that on balance, when people came in to trade on Tuesday, I’d be a better buyer than seller – for the first time in months – because the upside to downside ratio was pretty good.

If I’d only waited a day I would have less egg on my face but for the moment, I have been “lucky” that markets haven’t opened and people have not been able to trade on that change in recommendation. 

The question now is where should Keppel shares trade when uncontaminated by the possibility of being able to sell a portion at a higher price?

The obvious answer is “Probably lower.” But there is nuance in there. And a bunch of that nuance has to do with the fact that Sembcorp Marine has fallen more than 50% in just over 2 months because of the announcement of its intention to do a Rights Offering recapitalisation and spinout (see here for more on that story) which would deliver a bunch of SMM shares to people who might not necessarily want them. 

As always, more below the fold.

Side Notes:

Some of the insights which accompany this situation are noted below. 

The EGMs for both SCI and SMM are scheduled for 11 August. That’s “today” if you are reading this on Tuesday when you get back (or Monday in Europe or the US).

Past Insights on the Temasek Deal for Keppel

DateInsight TypeTitle
2019GeneralQuiddity Singapore M&A Guide 2019 
21 Oct 2019Deal-SpecificBIG Temasek Partial Offer for Keppel 
29 Oct 2019Deal-SpecificGauging Foreign Investment Review Risk for Temasek Takeover of Keppel 
27 Nov 2019GeneralThe Dummies’ Guide to Partial Offers/Tenders 
15 Dec 2019Deal-SpecificKeppel Corp – Trading Cheap To Its Comp Basket 
2 Feb  2020Deal-SpecificKeppel Corp Partial Offer Countdown – Still Cheap 
28 Feb 2020Deal-SpecificKeppel Corp Update – STILL Trading Cheap 
16 Mar 2020Deal-SpecificKeppel – Implied Likelihood of Temasek Walking Away or Dealbreak 
20 Mar 2020Deal-SpecificKeppel Corp Update – Implied Likelihood Up As Market Falls, Meaning… 
20 Mar 2020Deal-SpecificKeppel Corp Arb Grids – Updated 20 March 
30 April 2020 Deal-SpecificKeppel Corp Partial Tender Update – Odds Less In Your Favor Now Than Before 
4 May 2020Deal-SpecificKeppel Corp – Two Ways To Tender 
15 June 2020Deal-SpecificKeppel Corp – Stretched Vs Proxy Baskets And Now With New Risk 
26 July 2020Deal-SpecificKeppel “Material Impairments” May Mean A MAC Mess 
2 Aug 2020Deal-SpecificIt’s a MACastrophe!!! Keppel Surprises Bigly and Badly in O&M 

Smartkarma Webinar | Global Banks: Temperature Checks

By Smartkarma Research

In our latest Smartkarma Webinar, we are joined once again by Insight Provider Daniel Tabbush, who will discuss the challenges currently faced by global banks.

The webinar will be hosted on Wednesday, 12/August/2020, 5.00pm SGT/HKT.

Daniel Tabbush has 25 years of experience analysing Asia-Pacific banks, including HSBC, Standard Chartered, and Japanese and Australian banks. At the same time, his research and consulting focuses on global banking issues, including the regulatory environment. He was the Head of Asian Bank research at the number one Asian brokerage CLSA for most of his career, overseeing coverage of 80 banks and 10 analysts in Asia-Pacific.

Daniel started his own independent bank research and consultancy in 2012, under the banner name Tabbush Report. Since 2014, he has been a member of University of California San Diego Economics Leadership Council (ELC), supporting Economic students at the University through this alumni association, and providing guidance on Economics program development. Daniel grew up in Los Angeles, graduated from UCSD in Economics, cum laude and with Phi Beta Kappa honours. He lives with his family in Bangkok, and enjoys cooking, running and chess.


Cathay Rights Results And Excess

By Travis Lundy

In early June 2020, after other airlines had recapitalised themselves (Singapore Air, etc), gone bankrupt (Thai International Air), or gotten government bailouts (US airlines), Cathay Pacific Airways (293 HK) announced a package of financing including a bridge loan of HK$7.8bn, a pref share from the government of HK$19.5bn, accompanying warrants worth HK$1.95bn, and warrants to shareholders worth S$11.7bn at exercise for a total of HK$40.95bn of which HK$29.25bn came from the Hong Kong government. 

The owners of 85% of the shares promised to take up their rights, but banks underwrote the remaining portion in case the other shareholding public did not take them up. 

As it turned out, not everyone else took up their rights, as announced Friday night.

That means those who put in for excess will have bid for 989.3 million shares, and were allocated 62.42mm shares or about 6.31% of what they bid.

More below the fold.


KE Holdings/​​​Beike IPO – Can’t See Much Upside

By Sumeet Singh

KE Holdings Inc (BEKE US) (BEKE), a company backed by Tencent Holdings (700 HK)Softbank Group (9984 JP) and Hillhouse, aims to raise up to US$2.01bn in its US listing.

BEKE combines Lianjia, China’s leading real estate brokerage brand with more than 18 years of history, and Beike, China’s leading integrated online and offline platform for housing transactions and services with two years of history.

In this insight, I’ll talk about deal dynamics and run it through our ECM framework.


Before it’s here, it’s on Smartkarma

Most Read: Keppel Corp, KE Holdings Inc, Accordia Golf Trust, SK Biopharmaceuticals, Tencent Holdings and more

By | Daily Briefs, Most Read

In today’s briefing:

  • What Triggers a Temasek Decision on Keppel?
  • KE Holdings (Beike) IPO: Valuation Insights
  • Accordia Golf Discord Dismissed, Accord Reached. With a Bump.
  • SK Biopharmaceuticals – KOSPI200 Inclusion Confirmed, Large Impact Expected
  • Tencent 510 Support Pivot Pressure Sets up a Fade Trade

What Triggers a Temasek Decision on Keppel?

By Travis Lundy

When most of us saw the results announcement for Keppel Corp (KEP SP) last week it was most likely a surprise. It is eminently possible that under the Offer, Temasek had pretty good information about what the numbers would be like prior to them being released. If not, then one would expect their advisors did and could advise them. 

When Temasek came out with their statement on August 3rd saying they had not yet decided whether to invoke or waive the pre-condition which was breached as a result of Keppel’s Q2 2020 earnings report, the only real clarification was that a decision would be made by 31 August 2020.

The question for investors has multiple layers. 

  • If this MAC breach would trigger withdrawal, why not announce right away?
  • If Temasek has decided not to withdraw immediately, and several days have passed, one assumes that Temasek’s decision is contingent on something else. The question is… what is that other thing?
  • And if we can identify that other thing, are there multiple possible outcomes? Or only two?

More discussion below, and a refresh of implied withdrawal likelihood charts.


KE Holdings (Beike) IPO: Valuation Insights

By Arun George

KE Holdings Inc (BEKE US) is a combination of Lianjia, China’s leading real estate brokerage brand, and Beike, China’s leading integrated online and offline platform for housing transactions. KE has launched its IPO at a price range of $17-19 per ADS. At the mid-point of the IPO price range, KE will raise net proceeds of $1,841 million.

In our initiation note, we stated that our analysis suggests that if you consider the 1Q20 performance as a one-off (supported by the strong recovery in 2Q20), KE’s financial performance is heading in the right direction with strong revenue growth and rising margins. In our follow-on note which examined the 1H20 results, we stated that the 1H20 results showed a strong recovery across all financial metrics. We concluded that KE has attractive fundamentals. Overall, we think that a reasonable valuation and solid indication of interest from investors makes KE tempting at the proposed pricing range. 


Accordia Golf Discord Dismissed, Accord Reached. With a Bump.

By Travis Lundy

Accordia Golf (used to be 2131 JP, now private) was once a single unit. It managed and owned 100+ golf courses across Japan and was, at the time, the largest listed golf course business in Japan. In November 2012, rival PGM launched a hostile Tender Offer to take 51% of Accordia Golf at ¥81,000/share.

This was seen as low, and Accordia did not want to give up to its rival, but there is only so much a target can do on its own. The opportunity of the tender offer and its aftermath allowed funds operated by noted activist Yoshiaki Murakami to build up a big stake. Eventually, they owned something like 24%. In the meantime, however, in 2013 the company split its shares 100 for 1.

In June of 2014, Accordia announced it would go with an “asset light” strategy, spinning off its golf courses into a business trust to be listed in Singapore, IPOing that business trust which we know as Accordia Golf Trust (AGT SP), and then using the proceeds to launch a Tender Offer for 30% of its own shares at a premium – ¥1400/share.

It is not clear whether the entire defense and subsequent buyout had been arranged by Accordia, whether Murakami-san and his associates executed a strategy some might call greenmail which turned out OK for him, or whether devout and earnest activism led to a profound change of heart at Accordia’s top level of management, which coincidentally led to the best possible exit/outcome for Murakami-san and his associates. The pro-ration rate on the tender was, of course, quite high because there was a significant deemed dividend withholding tax – something to which corporate holders (and the Murakami entities are, I believe wholly non-coincidentally, corporate entities) are effectively immune. 

In 2016, Korea-based private equity firm MBK launched a Tender Offer to buy out the asset-light Accordia and so ended up owning the golf course operator and 28.5% of Accordia Golf Trust and 49% of the Accordia Golf Trust-Manager.

Over time, various parties owned significant single-digit percentages of the AGT entity in hopes that Accordia Golf would be by shortly to buy out the entity. In November 2019, Accordia Golf’s owner approached Accordia Golf Trust (AGT SP) with a proposal to buy out the golf courses (which would mean leaving AGT as a cash entity, and subject to windup). This was seen as long overdue, though the price was slightly on the low side, and would mean the reunification of golf course with golf course manager. Then we waited. 

In June 2020, AGT and its Trust Manager announced they had reached a deal with Accordia Golf and its manager to do so at a price of ¥61.8bn + ¥1.2bn owed back to unitholders. Then-largest non-affiliated unitholder Hibiki Path Advisors objected, suggesting a price of S$0.821 was more appropriate (after providing arguments in a press release. This objection was noted and repeated by several other investors (some of whom had even higher publicly-stated target prices), many of whom said they would not tender at the price proposed.

My opinion had been that, the offer might have been a trifle light, and getting the April-October dividend would have been completely reasonable so the market price was low, and low on a reward/risk assessment of likely outcomes. I did not expect a bump other than something in the S$0.022-0.25 range for and April-October distribution.

The objection culminated in a requisition to the Board of the Trustee Manager for an EGM, as discussed in Accordia Golf Trust Deal Gets More Complicated. Units which had been trading in the S$0.67-68 range fell to S$0.65, likely on fear that opposition would lead to impasse and a failed deal, and then trading was halted this past week pending an update.

The NEW News

The new news is that the Board of the manager of AGT – Accordia Golf Trust Management Pte Ltd – and the Buyer Accordia Golf have agreed on a new deal which lifts the ¥61.8bn price by ¥3.4bn which is roughly S$0.04/unit or a lift of approximately 5.5% against the assets bid price. 

Hibiki Path Advisors with 7.6% of the units out has (as has Santa Lucia Asset Management) to withddraw the Requisition Notice for an EGM, and to vote for the Proposed Asset Disposal and all other/subsequent shareholder meetings which lead to the transaction being successful. 

This leads to an actual payable uplift of S$0.03916 per unit (using a rate of SGDJPY 77.15) if one assumes that none of the 5% of the asset purchase price withheld would be held back in the time following the effective date of the transfer, lifting the “Expected Payout” on such terms (including the after-tax and shareholder split of the ¥1.2bn special reserve to be distributed) to be lifted from ~S$0.7182/share to ~S$0.7571/share. 

The deal is still conditional on a vote, but now that the two most vocal opponents have been placated, this looks likely to go through. When AGT SP commences trading, units will likely start trading with a substantially lower discount-to-worst and if not, they will be even more of a buy than they were when they were halted.

As always there is more below the fold.

Past Insights on Accordia Golf and Singapore M&A

2019 Travis Lundy  Quiddity Singapore M&A Guide 2019 
29 Nov 2019 Nicolas Van Broekhoven  Accordia Golf Trust: Privatization Likely at Min S$0.76/unit Leaves 13% Upside 
29 Jun 2020 Travis Lundy  Accordia Golf Trust Buyout… A Gimme But… 
5 Jul 2020 Travis Lundy  Major Accordia Golf Trust Shareholder Has Issues With Price & Process 
19 Jul 2020 Travis Lundy  Accordia Golf Responds to Hibiki Path 
28 Jul 2020 Travis Lundy  Accordia Golf Trust Deal Gets More Complicated 


SK Biopharmaceuticals – KOSPI200 Inclusion Confirmed, Large Impact Expected

By Brian Freitas

Late Friday evening, the KRX confirmed something that was widely expected. SK Biopharmaceuticals (326030 KS) meets the Fast Entry criteria for inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and will replace Kiswire Ltd (002240 KS) at the close of trading on 10 September, coinciding with the September futures expiry.

We estimate passive buying of around 830,000 shares (KRW 148bn) which is double the 10 day ADV for the stock. More importantly, given the voluntary lock ups on the stock, the 830,000 shares is nearly 8% of the tradeable shares. Given that the flippers will be out of the stock following the initial pop, the stock could get squeezed higher on passive buying ahead of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) inclusion.


Tencent 510 Support Pivot Pressure Sets up a Fade Trade

By Thomas Schroeder

Tencent Holdings (700 HK)  shows an increasing bias to press below 510 pivot support after failing to clear key resistance at 564 outlined in our recent insight Tencent Bullish Flat with Direction Break Points .

Friday’s plunge may very well be an over reaction and saw good bid support near the 500 handle that sets up a ST bounce trade. The higher conviction bet is to sell down or even short near 565 with a tight stop as the regional and global cycle work into a peak risk cycle and US chatter weighs on this crowded trade.

430 is the support in focus on a close below 510 and 475. 565 is the triple top level and key breakout point to work with.


Before it’s here, it’s on Smartkarma

Most Read: FamilyMart Co Ltd, Tencent Holdings, SBI Cards , Keppel Corp and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Japan Needs More Cowbell
  • Itochu Haz Opinionz About FamilyMart
  • Tencent (700 HK): Ban on WeChat Not Significant, But Panic May Continue
  • FTSE GEIS Index Rebalance Preview – India FOL Increase Commences
  • What Triggers a Temasek Decision on Keppel?

Japan Needs More Cowbell

By Travis Lundy

I had the privilege of writing a letter to the FT’s Alphaville in January titled “The GPIF and the complexity of stewardship” about some of the ESG and stewardship issues involved with passive investing, and particularly those which might concern the GPIF – the world’s largest pension fund at $1.5+trln.

During his tenure at the GPIF, then-CIO Hiro Mizuno promoted stronger stewardship, more rigorous voting practices, and true (not tick-the-box) engagement efforts from GPIF-allocated managers. He also changed the mandate and fee structure to aim for a win-win relationship with managers. Famously, he helped push for a policy of not lending out its foreign shares because he felt that stewardship could not be honest if the title were lent out (note the policy was already to not lend out the Japanese portfolio). However, passive funds (90% of the GPIF equity allocation) still face stewardship dilemmas.  

Helpfully, the GPIF has developed a public stewardship policy, and in its recent Stewardship Activities Report there is a section dedicated specifically to passive management, including “the possibility of collaborative engagement” (working with other investors to engage with a company), matching the change in the Japan Stewardship Code in March 2020. Engagement by its managers with investee management is designed to “encourage investee companies to increase their corporate value and the sustainable growth of the entire market from the long-term perspectives.” A rising tide lifts all boats.

In my letter to Alphaville I suggested, “Eliminating one of the root causes of undervaluation — a lack of active investor confidence that Japanese companies will do the right thing with the capital allocated to them — might be the best long-term investment the GPIF could ever make.”

Indeed, a key aspect of Principle 1 of the Japan Corporate Governance Code requires that directors and companies not conduct capital action that is not necessary, and which might be deleterious to the interests of minority shareholders. Alas, when one company owns a large stake in another, the interests on one side can conflict with the interests of minorities.

Takeover Governance & Stewardship

Takeovers – effectively the inverse of public capital raises – are key governance bottlenecks because at the “wrong” price, they cement a sub-optimal return on that capital forever. Good voting policy in mergers will solve a lot of issues. However, the issue of engagement with corporate governance becomes complicated with cash takeovers.

Somebody bids. The target board approves.

It is announced. Investors accept, or do not.

There is no vote on cash takeovers in Japan and the Target Board decision usually comes before any shareholder input. With a good governance process managing a change-in-control proposal, general investors can be reasonably sure they are obtaining an appropriate price for losing the chance to stay invested. However, where the bidder is already a controlling owner or manager, there is a possibility of serious conflict of interest, and governance problems galore.

 Recognizing this conflict of interest issue, METI created its MBO Guidelines in September 2007. Developments in Corporate Governance and the issue of listed subsidiaries meant newer guidelines for avoiding conflict of interest were desirable. METI presented revised Fair M&A Guidelines in June of 2019.

Those Guidelines (which are not law) are described as “ideal approaches to fair M&A” so as to mitigate the inherent conflicts of interest in transactions where the buyer has incumbent ownership, board position, and informational advantage.

The Guidelines note in implementing fair M&A…

  • A “market check” helps assure arms’ length pricing,
  • Transparency to mitigate information asymmetry is desirable,
  • Minority shareholders should benefit from a Special Committee made of independent directors, who should receive their own financial and legal advice – separate from that of the Board,
  • The Special Committee should receive an independent valuation, and a fairness opinion,
  • The Special Committee should demand a majority-of-minority threshold

Since then, many MBOs and parent-subsidiary sales/buyouts proposed in Japan have addressed these conflict of interests, following most if not all of the points mentioned in the Guidelines.

Some, however, have not. MBOs remain a sticking point. Recently, a few stand out.

Nichii Gakkan (9792)

Nichii Gakkan Co (9792 JP) – a decades-old company in one of the few natural growth industries in demographically-challenged Japan – nursing homes – saw its founder pass away last September. Board member heirs in management positions inherited shares, with an inheritance tax liability difficult to pay without selling some of the family’s combined 44% stake. An MBO proposal was made in conjunction with Bain with the stated goal of taking the company private to restructure some segments, promoting medium-long-term growth in corporate value without public investors suffering the indignities of a hit to short-term earnings. In May, the bidders offered a price 30% above the last traded price. That’s the pretty version of the story.

The less pretty version might be that the family, Bain, the Board, and management of Nichii Gakkan are irreparably conflicted with their general investors, who constitute the majority. They wanted to take the company private to get cash to pay their inheritance tax, but they wanted to keep control of the company, and they opportunistically lowballed investors. They started looking at the deal, concluding it was necessary, when the shares were trading near ¥1600/share and they would have expected to pay a 25+% premium. Markets fell, and they ended up bidding ¥1500/share.

To be clear, it is Bain’s job as an investor to buy things cheaply. As an investor, they have no duty of care to minority investors in companies they would seek to take over. 

But the Nichii Gakkan board does in this case.

Management is beholden to family control. Three quarters of the board is family or management. One director is from Bain Japan, joining the MBO. Two other board members are ‘independent’ (but were originally selected by the conflicted board) and it rested upon those two to defend the interests of the 56% of general shareholders against the conflicted 44% ownership and majority-conflicted Board.

The M&A Guidelines were an ideal place for the independent board members to look to ensure fairness.  In the Nichii Gakkan case, investors got none of it.

No market check. No transparency on how “fair valuation” was calculated from the Board. Independent directors received no independent legal or financial advice or valuation, and no fairness opinion. And there is no majority of minority clause to ensure half the 56% of public shareholders agree.

The Special Committee agreed to use a valuation report prepared by a conflicted advisor, who was hired on a fee-for-success basis by the conflicted Board, based on conflicted management’s unchecked forward revenue and EBIT forecasts, to agree to a conflicted owner/management proposal to buy and squeeze out minority investors. And independent board members went with that. They could have asked for a Fairness Opinion, but did not.

Reasonable minds may disagree on price. The market obviously thinks the Tender Offer Price for Nichii Gakkan to be light. The self-interested buyers think it “fair.” But three things stand out.

  • First, when the family engaged, they likely penciled in a premium to then-market price for control. Despite no subsequent change in profits or forecast, the offer price ended up lower.
  • Second, the official ‘Vision 2025’ Mid-Term Management Plan, reaffirmed as late as November 2019, targets forward profit and revenue which are multiples of the management forecasts in the “valuation” considered by the Board. There is no explanation for why management lowballed its long-standing board-approved long-term public targets.
  • Third, the banks’ lending package to fund this deal covers the entire purchase price. The equity being rolled over is just to finance the roll of some of the existing debt which may be covered by change of control clauses. If you LBO a company and the banks require zero money down, investors should consider if they are selling too cheaply.

These reasons, on top of the lack of appropriate governance procedure, are reasons for Nichii Gakkan investors to complain. It is, in fact, appropriate reason for all investors to sit up and take notice of what is happening in their portfolios.

What Can Be Done?

One could argue investors retain appraisal rights, and indeed the documents refer to those rights, but the Supreme Court decision on the JCOM takeover has neutered that avenue to some extent because a “fair process” is deemed to ensure a fair price.

My response to that is that when the only valuation to support board agreement on price is based on conflicted management forecasts, it is by definition impossible to achieve a “fair process” but this seems to have escaped the Court. More work is needed to ensure fairness.

The law is written. The guidelines are proposed. Boards and management are still conflicted. It is up to shareholders to defend their own interests. 

There are a few ways to fix this.

  1. One, changes could be made to law, mandating good behavior. The UK Takeover Code does just that to protect minority shareholders.
  2. Two, directors could be made liable for bad governance decisions as in other countries.
  3. Three, investors can spend years (or decades) trying to win hearts and minds of company management and boards through engagement.
  4. Four, investors can try to win the hearts and minds of fellow investors to ensure minority investors know how to protect themselves against weak governance. The big issue for investors is bad actors ignoring Guidelines, and exercising conflict of interest not possible in other markets.

Legal changes in Japan require years or decades of lobbying. The Nichii Gakkan tender ends, so far with two delays, in two weeks’ time. The board has approved the deal. Management agrees. That management happens to be affiliated with the buyer doesn’t help.

Engagement? Talk to the hand.

In this case and any other in the near-term, only “collaborative engagement” seems like a reasonable response. Unfortunately, in a foreshortened time frame (30 business days for many tender offers these days), “collaborative engagement” behind closed doors does not allow stewardship-minded investors to communicate their concerns so the wider investor base, perhaps less well-informed than pros, may digest the governance issues affecting long-term returns.

The only way left is public engagement.

So far, we know of one investor, LIM Advisors, which has presented its case to the Nichii Gakkan board and to the public. The board did not respond. LIM has re-presented its demands. From the 200+ other signatories to the Japan Stewardship Code who may also be concerned with governance and loss of capital due to management conflict of interest? Crickets.

That only one shows up publicly here, and only one showed up in the multi-month governance sham that was the Unizo takeover suggests signatories to the Japan Stewardship Code need to think more aggressively about how they engage. Stewardship Investors are mandated to follow a policy to achieve the best results for their investors. It should be no shame to engage publicly.

As always, more below the fold…


Itochu Haz Opinionz About FamilyMart

By Travis Lundy

「2300円以上の株式価値があるとは全く考えていない」

In no way do we think that the value of the shares is more than ¥2300.

That is the lead quote in a Nikkei Business article discussing the comments made by Itochu CFO Tsuyoshi Hachimura regarding the Tender Offer for FamilyMart in his free-form comments in the analyst meeting Q&A after reporting Q1 profits on 5 August. 

Various media outlets reported in English that Itochu would not pay more than that amount per share for FamilyMart.

The commentary surrounding that comment included content suggesting that FamilyMart had suffered greater coronavirus weakness than the other two major chains, perhaps because of greater placement in urban areas which saw less demand when offices emptied. In the original documents at the announcement of the deal, it was clear that the Board of FamilyMart Co Ltd (8028 JP) and management of Itochu Corp (8001 JP) disagreed on the term of the severe negative coronavirus impact on FamilyMart. On 5 August, Itochu made their position clear again. 

「(投資総額)5800億円は社内投資基準を満たす最大限度。無理にお金を払ってまで進めなければならないか、慎重に見ている」。TOBが成立しない場合、上場廃止の計画は白紙に戻して、「最大株主としてファミマに協力していく」

¥580bn is the maximum possible amount which meets our internal investment criteria. We are carefully looking at whether we will have to pay more than that.  If the TOB is not successful and we can’t delist FamilyMart, we will have to go back to the drawing board, and we will cooperate with FamilyMart as their largest shareholder. 

These are some of the quotes which made the papers in Japanese. 

But those quotes leave out considerable content, and a careful read of the document accompanying the earnings, which is a separate speech about the FamilyMart TOB (put out in Japanese but not in English) is in order. 

More below the fold. 

The previous insights in this series are:

  1. FamilyMart Tender Offer – Winnie and HunnyPot Redux 
  2. The Amended FamilyMart Document Is A MUST READ For Investor-Stewards 
  3. Japan Needs More Cowbell 

Tencent (700 HK): Ban on WeChat Not Significant, But Panic May Continue

By Ming Lu

  • We check with WeChat users in the US. There are few advertisements.
  • We believe the ban will extend to Tencent’s games. However, we do not believe the impact will be significant.
  • However, we believe the panic selling may continue next week.

FTSE GEIS Index Rebalance Preview – India FOL Increase Commences

By Brian Freitas

FTSE Russell is scheduled to announce the results of the September 2020 Semi-Annual Index Review (SAIR) on 21 August. The changes will be implemented as the close on 18 September and will be effective from the start of trading on 21 September.

The SAIR uses price data from the close of trading on 30 June to calculate the market capitalisation to be used in determining the list of inclusions and exclusions, while liquidity testing covers the period from 1 July 2019 to 30 June 2020.

We see 2 new additions to the index, SBI Cards (SBICARD IN) and Adani Green Energy (ADANIGR IN). We also see 9 stocks moving from the Small Cap to the Large Cap/Mid Cap segments: Tata Global Beverages (TGBL IN), Indraprastha Gas (IGL IN), Bayer Cropscience (BYRCS IN), Balkrishna Industries (BIL IN), Coromandel International (CRIN IN), Gujarat Gas Ltd (GUJGA IN), Ipca Laboratories (IPCA IN), Pi Industries (PI IN) and Srf Ltd (SRF IN).

We see one stock, IDFC Ltd (IDFC IN), moving from the Mid Cap to the Small Cap segment.

With FTSE starting to implement the FOL increase from this review, there will be passive buy flows on a lot of stocks. The main beneficiaries in terms of flow are Asian Paints (APNT IN), ICICI Bank Ltd (ICICIBC IN), Tata Consultancy Svcs (TCS IN) and Larsen & Toubro (LT IN)


What Triggers a Temasek Decision on Keppel?

By Travis Lundy

When most of us saw the results announcement for Keppel Corp (KEP SP) last week it was most likely a surprise. It is eminently possible that under the Offer, Temasek had pretty good information about what the numbers would be like prior to them being released. If not, then one would expect their advisors did and could advise them. 

When Temasek came out with their statement on August 3rd saying they had not yet decided whether to invoke or waive the pre-condition which was breached as a result of Keppel’s Q2 2020 earnings report, the only real clarification was that a decision would be made by 31 August 2020.

The question for investors has multiple layers. 

  • If this MAC breach would trigger withdrawal, why not announce right away?
  • If Temasek has decided not to withdraw immediately, and several days have passed, one assumes that Temasek’s decision is contingent on something else. The question is… what is that other thing?
  • And if we can identify that other thing, are there multiple possible outcomes? Or only two?

More discussion below, and a refresh of implied withdrawal likelihood charts.


Before it’s here, it’s on Smartkarma

Most Read: FamilyMart Co Ltd, Sarana Menara Nusantara, Tencent Holdings, PCCW Ltd, Alibaba Group and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Itochu Haz Opinionz About FamilyMart
  • TOWR IJ Placement – Stock Has Had a Good Run but past Deals Haven’t Been Great
  • Tencent (700 HK): Ban on WeChat Not Significant, But Panic May Continue
  • PCCW: Partial Offer To Lift Li Above 30%
  • BABA Reduce on Strength Ahead of 20% Pullback

Itochu Haz Opinionz About FamilyMart

By Travis Lundy

「2300円以上の株式価値があるとは全く考えていない」

In no way do we think that the value of the shares is more than ¥2300.

That is the lead quote in a Nikkei Business article discussing the comments made by Itochu CFO Tsuyoshi Hachimura regarding the Tender Offer for FamilyMart in his free-form comments in the analyst meeting Q&A after reporting Q1 profits on 5 August. 

Various media outlets reported in English that Itochu would not pay more than that amount per share for FamilyMart.

The commentary surrounding that comment included content suggesting that FamilyMart had suffered greater coronavirus weakness than the other two major chains, perhaps because of greater placement in urban areas which saw less demand when offices emptied. In the original documents at the announcement of the deal, it was clear that the Board of FamilyMart Co Ltd (8028 JP) and management of Itochu Corp (8001 JP) disagreed on the term of the severe negative coronavirus impact on FamilyMart. On 5 August, Itochu made their position clear again. 

「(投資総額)5800億円は社内投資基準を満たす最大限度。無理にお金を払ってまで進めなければならないか、慎重に見ている」。TOBが成立しない場合、上場廃止の計画は白紙に戻して、「最大株主としてファミマに協力していく」

¥580bn is the maximum possible amount which meets our internal investment criteria. We are carefully looking at whether we will have to pay more than that.  If the TOB is not successful and we can’t delist FamilyMart, we will have to go back to the drawing board, and we will cooperate with FamilyMart as their largest shareholder. 

These are some of the quotes which made the papers in Japanese. 

But those quotes leave out considerable content, and a careful read of the document accompanying the earnings, which is a separate speech about the FamilyMart TOB (put out in Japanese but not in English) is in order. 

More below the fold. 

The previous insights in this series are:

  1. FamilyMart Tender Offer – Winnie and HunnyPot Redux 
  2. The Amended FamilyMart Document Is A MUST READ For Investor-Stewards 
  3. Japan Needs More Cowbell 

TOWR IJ Placement – Stock Has Had a Good Run but past Deals Haven’t Been Great

By Sumeet Singh

An undisclosed vendor along with JPM plan to raise around US$200m via selling a 5.5% stake in Sarana Menara Nusantara (TOWR IJ).

We had covered the previous selldown in 2017 in TOWR Placement – A Chance to Get Exposure to Indonesia Towercos at an Inexpensive Valuation.

The stock has had a good run this year and is now trading at its all time highs. It also recently reported its 2Q20 results. 


Tencent (700 HK): Ban on WeChat Not Significant, But Panic May Continue

By Ming Lu

  • We check with WeChat users in the US. There are few advertisements.
  • We believe the ban will extend to Tencent’s games. However, we do not believe the impact will be significant.
  • However, we believe the panic selling may continue next week.

PCCW: Partial Offer To Lift Li Above 30%

By David Blennerhassett

For the 1H20, PCCW Ltd (8 HK)‘s revenue and EBITDA increased by 2% each to HK$18.281bn and HK$5.4bn, respectively. Net loss to shareholders was HK$547mn against HK$263mn in 1H19.

Negative EBITDA for the stubs ops are estimated at HK$150mn against negative HK$426mn & HK$52mn in 1H19 & 2H19 respectively.

Concurrent with the interim results, PCCW announced a special dividend involving the in-specie distribution of 657mn Pacific Century Premium Developments (432 HK) shares on the basis of 85 PCPD Shares for every 1,000 PCCW Shares held. At the same time, PCCW will convert the HK$592.53mn in convertible notes held notes held in PCPD into 1.185bn shares. Therefore PCCW will be left holding ~51% in PCPD after the conversion and distribution.

Additionally, PCCW will sell NOW TV to HKT Ltd (6823 HK) for HK$1.95bn.

And finally, PCCW announced a voluntary partial Offer by Richard Li for 2% of shares out at HK$5.20/share, a 15.8% premium to last close. 

PCCW popped 9.13% (as I type) on these announcements. 

That share price gain looks more fueled by sentiment than driven by the economics.

More below the fold.

Links to HKT‘s & PCPD‘s results.


BABA Reduce on Strength Ahead of 20% Pullback

By Thomas Schroeder

Alibaba Group (BABA US) has been a top long pick for some time and more recently a buy on the break above 215 in and bull triangle breakout in May/June. BABA met our 250 rally objective and is now attempting to breakout from fresh bull triangulation with a wave 5 terminal high due near 280 just below the 284 projection. We then expect a 20% correction.

Near term support at 250 is the bull/bear line to induce a final push higher or a rally failure. A key level for the first trade up with the second trade the more direction move to buy a pullback in September. 

Tech is looking crowded at this stage. NDX risk stems for the RSI 70 reading amid bear divergence.


Before it’s here, it’s on Smartkarma

Most Read: Nintendo Co Ltd, Mercari Inc, FamilyMart Co Ltd, SBI Cards , Sarana Menara Nusantara and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Nintendo – Super Duper Mario
  • Mercari – Our Ten Bagger Call Is Actually Starting to Look Somewhat Sane
  • Itochu Haz Opinionz About FamilyMart
  • FTSE GEIS Index Rebalance Preview – India FOL Increase Commences
  • TOWR IJ Placement – Stock Has Had a Good Run but past Deals Haven’t Been Great

Nintendo – Super Duper Mario

By Mio Kato, CFA

Nintendo Nintendoed 1Q results as they vastly exceeded consensus OP estimates of ¥64.6bn with a ¥144.7bn print… and then left FY guidance of ¥300bn in OP unchanged. They of course also left FY Switch hardware targets at 19m units, down 9.6% YoY despite selling 5.68m units (+166.6% YoY) in the non-holiday period first quarter. A quarter when they were by all accounts production constrained.


Mercari – Our Ten Bagger Call Is Actually Starting to Look Somewhat Sane

By Mio Kato, CFA

This is what Mercari just did:

  • Delivered a consolidated operating profit in 4Q (¥984m vs. consensus -¥3,477m)
  • Hit their USD100m GMV a month target in the US which everyone, including us (and we like to think of ourselves as the biggest bulls on Mercari) had completely given up on.
  • Delivered 40% YoY GMV growth in Japan while cutting promotion costs by one third QoQ.
  • Proposed to change their board structure from 6 inside directors and 2 outside directors to 2 inside directors and 3 outside directors, including one female outside director.
  • Unveiled a new data business which we have been excitedly touting for some time.

Yes, they benefitted from a COVID tailwind in both Japan and the US, but Mercari’s results outshine domestic EC-type competitors and their success in the US is eye-opening for a Japanese internet company. We are feeling very happy about this being our top conviction call for the year.


Itochu Haz Opinionz About FamilyMart

By Travis Lundy

「2300円以上の株式価値があるとは全く考えていない」

In no way do we think that the value of the shares is more than ¥2300.

That is the lead quote in a Nikkei Business article discussing the comments made by Itochu CFO Tsuyoshi Hachimura regarding the Tender Offer for FamilyMart in his free-form comments in the analyst meeting Q&A after reporting Q1 profits on 5 August. 

Various media outlets reported in English that Itochu would not pay more than that amount per share for FamilyMart.

The commentary surrounding that comment included content suggesting that FamilyMart had suffered greater coronavirus weakness than the other two major chains, perhaps because of greater placement in urban areas which saw less demand when offices emptied. In the original documents at the announcement of the deal, it was clear that the Board of FamilyMart Co Ltd (8028 JP) and management of Itochu Corp (8001 JP) disagreed on the term of the severe negative coronavirus impact on FamilyMart. On 5 August, Itochu made their position clear again. 

「(投資総額)5800億円は社内投資基準を満たす最大限度。無理にお金を払ってまで進めなければならないか、慎重に見ている」。TOBが成立しない場合、上場廃止の計画は白紙に戻して、「最大株主としてファミマに協力していく」

¥580bn is the maximum possible amount which meets our internal investment criteria. We are carefully looking at whether we will have to pay more than that.  If the TOB is not successful and we can’t delist FamilyMart, we will have to go back to the drawing board, and we will cooperate with FamilyMart as their largest shareholder. 

These are some of the quotes which made the papers in Japanese. 

But those quotes leave out considerable content, and a careful read of the document accompanying the earnings, which is a separate speech about the FamilyMart TOB (put out in Japanese but not in English) is in order. 

More below the fold. 

The previous insights in this series are:

  1. FamilyMart Tender Offer – Winnie and HunnyPot Redux 
  2. The Amended FamilyMart Document Is A MUST READ For Investor-Stewards 
  3. Japan Needs More Cowbell 

FTSE GEIS Index Rebalance Preview – India FOL Increase Commences

By Brian Freitas

FTSE Russell is scheduled to announce the results of the September 2020 Semi-Annual Index Review (SAIR) on 21 August. The changes will be implemented as the close on 18 September and will be effective from the start of trading on 21 September.

The SAIR uses price data from the close of trading on 30 June to calculate the market capitalisation to be used in determining the list of inclusions and exclusions, while liquidity testing covers the period from 1 July 2019 to 30 June 2020.

We see 2 new additions to the index, SBI Cards (SBICARD IN) and Adani Green Energy (ADANIGR IN). We also see 9 stocks moving from the Small Cap to the Large Cap/Mid Cap segments: Tata Global Beverages (TGBL IN), Indraprastha Gas (IGL IN), Bayer Cropscience (BYRCS IN), Balkrishna Industries (BIL IN), Coromandel International (CRIN IN), Gujarat Gas Ltd (GUJGA IN), Ipca Laboratories (IPCA IN), Pi Industries (PI IN) and Srf Ltd (SRF IN).

We see one stock, IDFC Ltd (IDFC IN), moving from the Mid Cap to the Small Cap segment.

With FTSE starting to implement the FOL increase from this review, there will be passive buy flows on a lot of stocks. The main beneficiaries in terms of flow are Asian Paints (APNT IN), ICICI Bank Ltd (ICICIBC IN), Tata Consultancy Svcs (TCS IN) and Larsen & Toubro (LT IN)


TOWR IJ Placement – Stock Has Had a Good Run but past Deals Haven’t Been Great

By Sumeet Singh

An undisclosed vendor along with JPM plan to raise around US$200m via selling a 5.5% stake in Sarana Menara Nusantara (TOWR IJ).

We had covered the previous selldown in 2017 in TOWR Placement – A Chance to Get Exposure to Indonesia Towercos at an Inexpensive Valuation.

The stock has had a good run this year and is now trading at its all time highs. It also recently reported its 2Q20 results. 


Before it’s here, it’s on Smartkarma

Most Read: Sunpower Group, China Longyuan Power Group Corp, Samsung Electronics, Sekisui House Reit, Asahi Group Holdings and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Sunpower (SPWG SP): “I Missed It”.NO, It Is Just Beginning. Strong 1H20 Results Forecasted Next Week
  • China Longyuan (916 HK): Running Out Of Puff?
  • Will Samsung Life Insurance Finally Be Forced to Sell Its Big Stake of Samsung Electronics?
  • FTSE GEIS Index Rebalance Preview September 2020 – Japan
  • Asahi Group Placement Tracker – No Signs of a Placement Even Though Net Debt to EBITDA Is at 8.2x

Sunpower (SPWG SP): “I Missed It”.NO, It Is Just Beginning. Strong 1H20 Results Forecasted Next Week

By Nicolas Van Broekhoven

“I missed it”. How often have we heard fund managers say this sentence once a stock makes an initial 10-20% upward move after being stagnant for a long time?

Yesterday’s price action in Sunpower Group (SPWG SP) could be this inflection point. Please, don’t think you have missed it. The discovery of Sunpower still needs to happen. YTD the stock is down 10%.

Given the fact that Sunpower is a domestic China story and Chinese equity markets have been hot, there is a disconnect. Not only is the GI division growing, but also the M&S division will see a 200bps increase in EBIT margins from 10.8% in FY19 to 12.8% in FY20. 

We have been beating the drum how cheap Sunpower is for a few years now. Yet the stock has meandered between approximately 0.40-0.60 SGD.

The core message is this: as per 1Q20, the company has invested approximately 1 billion USD in GI assets. The market cap of Sunpower today is 285 million USD. Proving Mr.Market the 1 billion USD in GI assets is worth at least 1 billion USD to equity holders is the next step.

As FY21-FY22 comes into focus the PE investors will convert their CB’s and become fully vested in Sunpower. PE funds have timelines and they need to realize value for their LPs.

There are multiple ways to realize value at Sunpower:

  1. Sell Sunpower to another party 
  2. Monetize asset base. This can be either M&S division sale or GI asset divestments 
  3. Bring in long-term strategic investor at a large premium to the current market price
  4. List in mainland China or HK

Our Fair Value at Sunpower remains unchanged at 1 SGD, which leaves 82% upside.


China Longyuan (916 HK): Running Out Of Puff?

By David Blennerhassett

Wind-power play China Longyuan Power Group Corp (916 HK) (CLPG) gained 13% on the 30 July, on ~7x the normal volume (three-month average), plus another 6.3% the following day on even higher volume. With a further 7.2% added today, how much more can this run if indeed CLPG is rumoured to be next clean-energy privatization play?

Hong Kong-listed, clean-energy companies subject to a privatisation or change of control, have been all the rage since the Offer for China Power New Energy Development Co (735 HK) was first floated in March 2019. 

Company

A’ment

Premium

Circ/Scheme Doc

Completed 

Ops

41.9%/101.9%
28-Aug-19
NG/Wind
Solar
46.08%/51.28%
Wind
Wind/NG/Solar
65.56%/85.34%
Wind/Solar/Hydro
NG/Wind/Solar
Source: HKEx, NG = Natural gas, Premium vs the undisturbed and three-month closing average.

As a PRC-incorporated company, SOE-CHN Energy has two approaches in which to take 58.44%-held CLPG private. Or alternatively, convert its domestic shares in CLPG into A-shares. 


Will Samsung Life Insurance Finally Be Forced to Sell Its Big Stake of Samsung Electronics?

By Douglas Kim

In this insight, we discuss the increasing probability that Samsung Life Insurance may be finally forced to sell its 8.5% stake in Samsung Electronics by a change in government regulations. This has been discussed for more than a decade but there has been no major change until now.

However, with the completion of the National Assembly Election on April 15th and the ruling party gaining 176 out of 300 seats in the National Assembly, there has been an increasing possibility that the regulators may finally be able to change laws that will require Samsung Life Insurance to sell its big stake in Samsung Electronics. 

All in all, the two companies most likely to step up to buy additional stakes in Samsung Electronics to be sold by Samsung Life Insurance and Samsung F&M Insurance include Samsung C&T and Samsung SDS. It also appears that Samsung C&T and Samsung SDS have the financial capacity to purchase at least 10 trillion won worth of Samsung Electronics. In addition, this share purchase could be made over a five year period, rather than all at once which provides more time for them to increase their stakes. 

What’s unsure is that although 10 trillion won is a lot of money, that covers only about half of the total amount of Samsung Electronics that need to be sold. Therefore, it appears that this uncertainty regarding the potential passage of the Insurance Business Act could put further negative pressures on Samsung Electronics in the coming months. 


FTSE GEIS Index Rebalance Preview September 2020 – Japan

By Brian Freitas

FTSE Russell is scheduled to announce the results of the September 2020 Semi-Annual Index Review (SAIR) on 21 August. The changes will be implemented as the close on 18 September and will be effective from the start of trading on 21 September.

The SAIR uses price data from the close of trading on 30 June to calculate the market capitalisation to be used in determining the list of inclusions and exclusions, while liquidity testing covers the period from 1 July 2019 to 30 June 2020.

We see 4 stocks migrating from the Small Cap segment to the Mid Cap segment (joining the All-World index) and 19 J-REITs joining the All-World index, while we see 15 stocks migrating from the Mid Cap to the Small Cap segment (leaving the All-World index and joining the All-cap index). 

Add to All-World IndexDelete from All-World Index
CodeNameCodeName
1973NEC Networks & System Integration Corp1333Maruha Nichiro Corp
3226Nippon Accommodations Fund Inc1662Japan Petroleum Exploration Co Ltd
3234Mori Hills Reit Investment Corp5631Japan Steel Works Ltd
3249Industrial & Infrastructure Fund Investment Corp5803Fujikura Ltd
3269Advance Residence Investment Corp6395Tadano Ltd
3279Activia Properties Inc6472NTN Corp
3281GLP J-REIT7189Nishi-Nippon Financial Holdings Inc
3283Nippon Prologis REIT Inc7327Daishi Hokuetsu Financial Group Inc
3309Sekisui House Reit Inc7732Topcon Corp
3462Nomura Real Estate Master Fund Inc7762Citizen Watch Co Ltd
4186Tokyo Ohka Kogyo Co Ltd8242H2O Retailing Corp
6750Elecom Co Ltd8377Hokuhoku Financial Group Inc
7476As One Corp9107Kawasaki Kisen Kaisha Ltd
8951Nippon Building Fund Inc9603H.I.S. Co Ltd
8952Japan Real Estate Investment Corp9832Autobacs Seven Co Ltd
8953Japan Retail Fund Investment Corp
8954Orix JREIT Inc
8955Japan Prime Realty Investment Corp
8960United Urban Investment Corp
8967Japan Logistics Fund Inc
8972Kenedix Office Investment Corp
8976Daiwa Office Investment Corp
8984Daiwa House Reit Investment Corp

J-REITs will be included in the FTSE GEIS for the first time at the upcoming September semi-annual review. The inclusion will be made in 4 tranches starting with the September 2020 review and concluding at the June 2021 review.


Asahi Group Placement Tracker – No Signs of a Placement Even Though Net Debt to EBITDA Is at 8.2x

By Sumeet Singh

Asahi Group Holdings (2502 JP) reported its 2Q20 results today. Along with its results it also provided updates on its recently completed Carlton & United Breweries (CUB) acquisition and its full year estimates.

In this insight, I’ll look at the results and other recent updates.


Before it’s here, it’s on Smartkarma

Most Read: LINE Corp, Alibaba Health Information Technology, Leyou Technologies, Axis Bank Ltd, LINE Corp and more

By | Daily Briefs, Most Read

In today’s briefing:

  • The End of the LINE (3938)
  • Alibaba Health Placement – A Few Headwinds but Multiple Tailwinds
  • Leyou – You Need to Be Tracking Warframe This Month if You Own This
  • Axis Bank Placement – Jumping the Queue
  • LINE Joint Tender: Cash Price, Schedule, & Squeeze-Out

The End of the LINE (3938)

By Travis Lundy

Today after the close, Naver Corp (035420 KS) and Softbank Corp (9434 JP) announced that the two companies would launch a Tender Offer for the shares in LINE Corp (3938 JP) not held by Naver. This is as originally planned, and the Tender Offer Price is as originally planned – ¥5380/share – i.e. no change in price.

Softbank Corp released a Notice Concerning the Commencement of the Tender Offer (starts tomorrow) and LINE issued its Target Opinion.  Naver, Softbank, LINE, and Z Holdings (4689 JP) also announced the Conclusion of their Business Alliance MOU and a Schedule for the Implementation of their Business Alliance.

The terms and structure of the business follow the Definitive Integration Agreement as signed and announced on 23 December 2019 and as discussed in depth in New Deal for LINE (A Lot like the Old Deal).

Those participating in the recent letter-writing campaign will be upset.  There are perhaps reasons for them to be upset, and the line at the end of one section explaining the Special Committee’s reasoning will not make them less upset. 

…it is not necessary to change the Tender Offer Price considering such factors and determinations, and considering the Company’s determination that the Business Integration is in the best interests of the minority shareholders of the Company.”

This particular quote, capping a whole paragraph of explanation which does nothing to give comfort to aggrieved investors, is just wrong. One would hope that investment bankers who are paid the big bucks would at least figure out how to lie better. 

The Company [LINE] has decidedly not determined that the Business Integration is in the best interests of the minority shareholders.

The Tender Offer may be, but the Integration is not. The LINE minority shareholder is being paid a premium to where shares were traded before the announcement, and that premium is inside the “fair value” DCF range, but not above it, and that fair value DCF range explicitly does not consider any synergies of the business integration. 

The decision to conduct the Business Integration is Naver’s and Softbank Corp’s. They could presumably do quite a bit together without doing the Tender Offer – after all they control a majority and a super-majority of LINE, and this deal could have been structured differently.

If the Tender Offer is in the best interests of the minority shareholders, that means the Business Integration – the basis of which apparently requires the Tender Offer – is NOT in the best interests of Naver, nor likely in the best interests of Softbank Corp and Z Holdings minority shareholders either. 

But I expect the overzealous copywriters investment bankers liked the way it sounded. 

Because of the shareholder structure, if letter-writing LINE minorities have a problem with the Tender Offer and where they get squeezed out, they need to take it to court. This is a done deal.

As always, more below the fold.

Previous insights related to this situation and the names involved are listed below.

Relevant Insights

DateAuthorTitle

About Cashless Payments

13 Mar 2019Michael Causton Loyalty Points In Japan: More Loyalty, More Points and the Conduit to Cashless Payments 
2 Apr 2019Mio Kato, CFA Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars 
28 Jun 2019Supun Walpola Paying with PayPay: A Deep Dive into Yahoo! Japan’s Mobile Payment Business 
6 Jan 2020Michael Causton Lawson and KDDI Join Forces in Cashless Payments War 
24 Jan 2020Michael Causton Mercari – Merpay Acquisition of Origami Pay Continues Cashless Consolidation 
15 Feb 2020Michael Causton Japan Payment Wars: NTT Docomo and Merpay/Origami to Attempt Catch up with PayPay and Rakuten 
20 Mar 2020Michael Causton Some Resistance to Cashless Payments in Japan 
28 Apr 2020Michael Causton Z Holdings and Yamato Create Fulfilment Service for All to Rival Rakuten and Amazon 
29 Jul 2020Supun Walpola Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint 

About This Deal

14 Nov 2019Travis LundyZ and LINE, Sitting in a Tree… M.E.R.G.I.N… G…? 
18 Nov 2019Travis LundyLINE and Z, Sitting in a Tree… M.E.R.G.I.N.G! And a Tender Offer! 
26 Dec 2019Travis LundyNEW Deal for LINE (A Lot Like the Old Deal)
6 July 2020Travis LundyMarket Is Pricing a LINE Bump – Should It? 
22 July 2020Travis LundyA LINE Bump – The Other Argument Against 
29 July 2020Travis LundyLINE (3938) – This Is Not the Kitchen Sink You Are Looking For 

In addition to the above insights, Michael Causton’s The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return is worth a read to know more about Z Holdings going forward and Mio Kato, CFA‘s Zozo – Nice Results but It’s Just a COVID Bump takes the view that results announced last week were less impressive than the headline numbers.


Alibaba Health Placement – A Few Headwinds but Multiple Tailwinds

By Sumeet Singh

Alibaba Health Information Technology (241 HK) aims to raise around US$1bn via a primary placement.

The company aims to use the proceeds to further develop its pharma and healthcare omni-channel business. The stock has had a great run over the past few years, and especially this year. Despite that, it appears to have a lot more left in the bag, in terms of future earnings growth.


Leyou – You Need to Be Tracking Warframe This Month if You Own This

By Mio Kato, CFA

We had previously expressed some scepticism about the longevity of Warframe, and thus the valuation of Leyou overall. While we have not abandoned that view, some recent developments do have us questioning whether there could be a change in Warframe’s momentum, at least in the short-term. More below.


Axis Bank Placement – Jumping the Queue

By Sumeet Singh

Axis Bank Ltd (AXSB IN) aims to raise up to US$1.36bn in via a qualified institutional placement (QIP). 

I had taken an early look at the deal in Axis Bank Placement – Early Look – Looking to Raise US$2bn.

In this insight, I’ll talk about the updates since then.


LINE Joint Tender: Cash Price, Schedule, & Squeeze-Out

By Sanghyun Park

Naver put out three regulatory filings about the joint tender to LINE shareholders yesterday on DART.

First of all, cash bid price? Unfortunately, it stays the same at ¥5,380.

In the second regulatory filing, Naver set the split effective date on February 28, 2021. Then, the shareholder meeting? It will be sometime in February next year.

The last regulatory filing is about Naver standing surety for the acquirer, Naver J.Hub. 


Before it’s here, it’s on Smartkarma

Most Read: , LINE Corp, Kawasumi Laboratories, Sarana Menara Nusantara, KE Holdings Inc and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Asian SaaS Stars: Opportunities, Market Outperformance, & Key Challenges
  • The End of the LINE (3938)
  • Kawasumi Labs Takeout Tender Offer – Big Premium Is Not Too Big
  • Sarana Menara Nusantara (TOWR IJ): Potential Inclusion in MSCI & FTSE Indices
  • KE Holdings (Beike) IPO: Updated Filings Point to a V-Shaped Recovery

Asian SaaS Stars: Opportunities, Market Outperformance, & Key Challenges

By Douglas Kim

The Asian Software-as-a-Service (SaaS) is a highly fragmented sector filled with numerous innovative companies. Thousands of companies compete in the Asian SaaS sector. In this insight, we have included 105 companies, including 56 public companies and 49 private companies in Asia. 

The 56 public companies have a total market cap of $367.2 billion won. The top 10 companies in this list have a total market cap of $298.1 billion won. Among the top-ranked companies, those from India and Australia stand out. India and Australian companies accounted for 8 out of 10 top-ranked companies in this list. We have provided the rankings of these companies on their market cap basis. We have included 6 major countries/regions in Asia including Japan, China, Australia, India, Korea, and Southeast Asia (Singapore, Malaysia, and Thailand).

Keep in mind that although these 56 public companies all provide some sorts of SaaS related products and services, not all of them have a 100% SaaS business model. Rather, for most of these software-related companies, SaaS is becoming a greater portion of their incoming revenues. Among all the public companies, Atlassian Corp (TEAM US) (Australia) is probably the biggest pure-play SaaS company right now with a market cap of US$42.7 billion. The 49 private companies that we have included in this insight tend to be smaller companies but they tend to be more pure-play SaaS providers.

SaaS is becoming more important in companies, our homes, and in our lives due to the accelerating evolution of technology in terms of greater adoption of cloud-based services, smartphones, AI, Big Data, IoT, and increasing programming sophistication that reduces the need for human, manual labor. Adam Smith would be very proud of SaaS today, as massive amounts of global venture capital and start-up funding have tried to accelerate promising SaaS companies as the global competition has forced the very best companies to sprout in this highly competitive market.

In Asia, some of the best companies in the SaaS segment include Atlassian (Australia), After Pay (Australia), Xero (Australia), One Connect (China), Kingdee (China), Kingsoft (China), Douzone Bizon (Korea), Freee KK (Japan), and Rakus (Japan).

The main purpose of this report is as follows:

  • Identify the major players (both public & private) in the highly fragmented SaaS sector in Asia
  • Specify the key trends driving the Asian SaaS industry
  • Provide an initial overview of the key companies in the Asian SaaS industry
  • Highlight the main risks of this industry

The End of the LINE (3938)

By Travis Lundy

Today after the close, Naver Corp (035420 KS) and Softbank Corp (9434 JP) announced that the two companies would launch a Tender Offer for the shares in LINE Corp (3938 JP) not held by Naver. This is as originally planned, and the Tender Offer Price is as originally planned – ¥5380/share – i.e. no change in price.

Softbank Corp released a Notice Concerning the Commencement of the Tender Offer (starts tomorrow) and LINE issued its Target Opinion.  Naver, Softbank, LINE, and Z Holdings (4689 JP) also announced the Conclusion of their Business Alliance MOU and a Schedule for the Implementation of their Business Alliance.

The terms and structure of the business follow the Definitive Integration Agreement as signed and announced on 23 December 2019 and as discussed in depth in New Deal for LINE (A Lot like the Old Deal).

Those participating in the recent letter-writing campaign will be upset.  There are perhaps reasons for them to be upset, and the line at the end of one section explaining the Special Committee’s reasoning will not make them less upset. 

…it is not necessary to change the Tender Offer Price considering such factors and determinations, and considering the Company’s determination that the Business Integration is in the best interests of the minority shareholders of the Company.”

This particular quote, capping a whole paragraph of explanation which does nothing to give comfort to aggrieved investors, is just wrong. One would hope that investment bankers who are paid the big bucks would at least figure out how to lie better. 

The Company [LINE] has decidedly not determined that the Business Integration is in the best interests of the minority shareholders.

The Tender Offer may be, but the Integration is not. The LINE minority shareholder is being paid a premium to where shares were traded before the announcement, and that premium is inside the “fair value” DCF range, but not above it, and that fair value DCF range explicitly does not consider any synergies of the business integration. 

The decision to conduct the Business Integration is Naver’s and Softbank Corp’s. They could presumably do quite a bit together without doing the Tender Offer – after all they control a majority and a super-majority of LINE, and this deal could have been structured differently.

If the Tender Offer is in the best interests of the minority shareholders, that means the Business Integration – the basis of which apparently requires the Tender Offer – is NOT in the best interests of Naver, nor likely in the best interests of Softbank Corp and Z Holdings minority shareholders either. 

But I expect the overzealous copywriters investment bankers liked the way it sounded. 

Because of the shareholder structure, if letter-writing LINE minorities have a problem with the Tender Offer and where they get squeezed out, they need to take it to court. This is a done deal.

As always, more below the fold.

Previous insights related to this situation and the names involved are listed below.

Relevant Insights

DateAuthorTitle

About Cashless Payments

13 Mar 2019Michael Causton Loyalty Points In Japan: More Loyalty, More Points and the Conduit to Cashless Payments 
2 Apr 2019Mio Kato, CFA Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars 
28 Jun 2019Supun Walpola Paying with PayPay: A Deep Dive into Yahoo! Japan’s Mobile Payment Business 
6 Jan 2020Michael Causton Lawson and KDDI Join Forces in Cashless Payments War 
24 Jan 2020Michael Causton Mercari – Merpay Acquisition of Origami Pay Continues Cashless Consolidation 
15 Feb 2020Michael Causton Japan Payment Wars: NTT Docomo and Merpay/Origami to Attempt Catch up with PayPay and Rakuten 
20 Mar 2020Michael Causton Some Resistance to Cashless Payments in Japan 
28 Apr 2020Michael Causton Z Holdings and Yamato Create Fulfilment Service for All to Rival Rakuten and Amazon 
29 Jul 2020Supun Walpola Z Holdings [Alt Data]: PayPay Mall and PayPay Flea Market Continue to Disappoint 

About This Deal

14 Nov 2019Travis LundyZ and LINE, Sitting in a Tree… M.E.R.G.I.N… G…? 
18 Nov 2019Travis LundyLINE and Z, Sitting in a Tree… M.E.R.G.I.N.G! And a Tender Offer! 
26 Dec 2019Travis LundyNEW Deal for LINE (A Lot Like the Old Deal)
6 July 2020Travis LundyMarket Is Pricing a LINE Bump – Should It? 
22 July 2020Travis LundyA LINE Bump – The Other Argument Against 
29 July 2020Travis LundyLINE (3938) – This Is Not the Kitchen Sink You Are Looking For 

In addition to the above insights, Michael Causton’s The Zozo Revival: A New Private Brand of Many Names, Category Expansion, Merchants Return is worth a read to know more about Z Holdings going forward and Mio Kato, CFA‘s Zozo – Nice Results but It’s Just a COVID Bump takes the view that results announced last week were less impressive than the headline numbers.


Kawasumi Labs Takeout Tender Offer – Big Premium Is Not Too Big

By Travis Lundy

On Friday 31 July 2020, after the close, Sumitomo Bakelite (4203 JP) announced a Tender Offer to buy out minorities in medical device manufacturer Kawasumi Laboratories (7703 JP).

This deal comes at a knockout premium of 116.8% or ¥1700/share, which is a 20+yr high. 

But it is not that much of a knockout price. Most of the market cap at takeover price is in net cash and securities, and net receivables. Using those terms, the Adjusted EV/EBITDA of this deal is under 4x the 20yr low EBITDA. Get some synergies in place and it’s cheaper. 

It is hard to say how much the Special Committee’s presence is theater or how much it helped. The first bid at ¥1250/share was a 10+yr high price, but it was still came out to be a negative Adjusted EV. At ¥1700, if the PP&E were sold and leased back, the takeover price is still negative Adjusted EV. 

But the price was marched upward, even if the Special Committee had no advisors, no fairness opinion, no market check, and the conflicted advisors provided little in the way of transparency of calculation except for the transparency that the “fair value” did not include synergies, despite METI Fair M&A Guidelines suggesting is due general shareholders (or at least an “appropriate portion” is). There IS a majority of minority, but that is simply mechanical as the Sumi in Kawasumi Labs has less than one third currently. But with crossholding likely to tender into Sumitomo Bakelite’s bid, ex-crossholders the deal does NOT require a majority of minority. 

However, it will likely get done anyway. More below the fold. 


Sarana Menara Nusantara (TOWR IJ): Potential Inclusion in MSCI & FTSE Indices

By Brian Freitas

Sarana Menara Nusantara (TOWR IJ) is an Indonesia-based investment company focusing on investing in operating companies that specialize in owning and operating telecommunication towers and leasing them for wireless operators.

The stock is not a member of the MSCI Standard indices or the FTSE Global Equity Index Series, but that could change in the next couple of months with the stock entering both indices post its rally over the last few months.

We estimate MSCI and FTSE trackers will need to buy 1.63bn shares between them. At around 8% of the free float of the company, the passive buying could push the stock higher due to the lower real world free float.


KE Holdings (Beike) IPO: Updated Filings Point to a V-Shaped Recovery

By Arun George

KE Holdings Inc (BEKE US) is a combination of Lianjia, China’s leading real estate brokerage brand, and Beike, China’s leading integrated online and offline platform for housing transactions. It is seeking to raise $2 billion through an IPO on the New York Stock Exchange, according to press reports. In our initiation note, we stated that our analysis suggests that if you consider the 1Q20 performance as a one-off (supported by the strong recovery in 2Q20), KE’s financial performance is heading in the right direction with strong revenue growth and rising margins. While the cash generation is weak, it is due to external circumstances. We concluded by stating that the KE IPO is worth a close look.

KE released an F-1/A filing which disclosed the complete 1H20 results. The original F-1 filing provided the segmental GTV (gross transaction value) and revenue in 2Q20. Crucially, the 1H20 results showed a strong recovery across all financial metrics. Overall, we continue to think that KE has attractive fundamentals.


Before it’s here, it’s on Smartkarma

Most Read: Keppel Corp, Haier Electronics Group Co, Nichii Gakkan Co, Haier Electronics Group Co, and more

By | Daily Briefs, Most Read

In today’s briefing:

  • It’s a MACastrophe!!! Keppel Surprises Bigly and Badly in O&M
  • Haier (1169 HK): Avatar Scrip Offer From Parent
  • Nichii Gakkan: Will a Blandiloquent But Bletcherous Bain Bump Bulldoze Backbenchers?
  • Haier Electronics’ Privatisation Bid from Haier Smart Home
  • Asian SaaS Stars: Opportunities, Market Outperformance, & Key Challenges

It’s a MACastrophe!!! Keppel Surprises Bigly and Badly in O&M

By Travis Lundy

Keppel Corp (KEP SP) announced earnings a day earlier than most expected, and they were a doozy. The Net Loss for H1 was the worst net loss of any fiscal half in the past twenty years. Worse even than H2 2017 when they took a S$112mm loss on an investment and a S$619mm penalty in Brazil? Yup. Worse than that. 

The Net Loss in H1 was S$547mm, driven mostly by S$930mm of impairments (S$890mm in the Offshore & Marine segment) and a total of S$959mm in red ink in the O&M segment (even though EBITDA was actually positive in the segment). 

The Documents: Financial Statements Media Release, Management Script for the Call, the Presentation Deck for the Call, Transcript for the Q&A session of the Call, Rule 706A Transactions report, Interim Div announcement.

Overall, partly helped by sales of stakes in Keppel DC REIT (KDCREIT SP) and Keppel REIT (KREIT SP), on an ex-writedowns basis, Q2 was pretty strong compared to Q2 2019 and compared to where most would have thought the quarter would have ended up given 

H1 ex-impairments saw year-on-year gains in EBITDA of +13%, OP +4%, Profit Before Tax +13%, and EPS +4%. Unfortunately, ex-revaluation gains of S$113mm, OP ex-impairments would have fallen 10%. So overall, the end result is not as bad as the headline shows, but not as good as the “adjusted result” suggests it might have been. FCF outflow for the first fiscal half was S$278mm.

MACastrophe?

Assuming that the last four quarters ended 30 June 2020 would be the four quarters used to measure whether or not Keppel had breached any of the pre-conditions to the Temasek Partial Offer, the Profit-After-Tax number has clearly breached the Material Adverse Change (MAC) clause in Schedule 1 (Pre-Conditions) Paragraph 3(iii) in the original document

The cumulative net profit after tax but before non-controlling interests (the “PAT”) of the Group for the 12 months ended on the balance sheet date of the latest Subsequent Financials (the “Latest Subsequent Financials”) released prior to the Formal Partial Offer Announcement Date (the “Relevant PAT”)18 showing a decrease of 20.00 per cent. or more from the cumulative PAT of the Group for the 12 months ended 30 September 2019 of S$696 million.”

How badly did it miss the S$556.8mm hurdle?

It needed to achieve S$22mm for the quarter, and missed that number by ~S$721mm. 

That’s a miss. 

The question Keppel investors now face is whether Temasek proceeds with the Partial Offer, walks away, does a third thing, and what are the shares worth in each case. On Saturday 1 August, Temasek released an announcement on the SGX to the effect that the Q2 financials for Keppel had indeed missed (they say the bogey was +S$556.9mm and the result was -S$164.7mm) and they recognized this condition breach, but said they had not decided yet what to do.

Investors are now in limbo. Temasek has clearly said they may or may not waive the MAC Pre-Condition and the Partial Offer may or may not eventuate. But because Temasek’s Pre-Conditional Partial Offer is partial, they are only in Partial Limbo.

As always, much more below the fold.

Past Insights on the Temasek Deal for Keppel

DateInsight TypeTitle
2019General Quiddity Singapore M&A Guide 2019 
21 Oct 2019Deal-Specific BIG Temasek Partial Offer for Keppel 
29 Oct 2019Deal-Specific Gauging Foreign Investment Review Risk for Temasek Takeover of Keppel 
27 Nov 2019General The Dummies’ Guide to Partial Offers/Tenders 
15 Dec 2019Deal-Specific Keppel Corp – Trading Cheap To Its Comp Basket 
2 Feb  2020Deal-Specific Keppel Corp Partial Offer Countdown – Still Cheap 
28 Feb 2020Deal-Specific Keppel Corp Update – STILL Trading Cheap 
16 Mar 2020Deal-Specific Keppel – Implied Likelihood of Temasek Walking Away or Dealbreak 
20 Mar 2020Deal-Specific Keppel Corp Update – Implied Likelihood Up As Market Falls, Meaning… 
20 Mar 2020Deal-Specific Keppel Corp Arb Grids – Updated 20 March 
30 April 2020 Deal-Specific Keppel Corp Partial Tender Update – Odds Less In Your Favor Now Than Before 
4 May 2020Deal-Specific Keppel Corp – Two Ways To Tender 
15 June 2020Deal-Specific Keppel Corp – Stretched Vs Proxy Baskets And Now With New Risk 
26 July 2020Deal-Specific Keppel “Material Impairments” May Mean A MAC Mess 

Haier (1169 HK): Avatar Scrip Offer From Parent

By David Blennerhassett

Haier Electronics Group Co (1169 HK) (HEG) was briefly suspended pursuant to the Takeovers Code on the 19 December 2019, which was followed by a press release from Haier’s parent Haier Smart Home (600690 CH) (HSH) that it was contemplating taking Haier private with newly issued Hong Kong shares, implying HSH was seeking an H-share listing, either first, or concurrent with the share swap.

Then crickets.

The Announcement

This past Friday evening, HEG announced a pre-conditional Scheme such that HEG shareholder will receive 1.6 new HSH H shares plus HK$1.95 in cash. 

An independent valuer places a fair value for the (as yet unlisted) H shares between RMB16.45-RMB16.90/share. This backs out an indicative value under the Scheme of HK$31.11-HK$31.90 – or $31.51 at the mid-point, against HEG’s last close of HK$26.85; but a 44.20% premium to the price at the time of the 2019 December suspension. Plus an all-time high. The cash/equity split is 6.2%/93.8%. The A-shares closed last Wednesday (the day before shares were halted) at RMB 18.00, which would be closer to HK$33.95 (including the $1.95 in cash).

The pre-conditions concern CSRC approval with respect to the issuance of the H shares and approval by two-thirds of HSH’s shareholders to approve the resolutions.

And then there are the exchangeable bonds to take into account.

More below the fold.


Nichii Gakkan: Will a Blandiloquent But Bletcherous Bain Bump Bulldoze Backbenchers?

By Travis Lundy

From the start, this has been a case about a bump. My original piece was titled Nichii Gakkan MBO:  Great Deal for the Buyers (Not so Much for Minorities).

The process was bad. The price was too low. All it needed was for shareholders to object. 

After going limit up the day after the announcement, the stock has not once traded at or below terms. Eventually – a full month after the original announcement, one shareholder publicly objected with a Letter complaining both about process and valuation. 

The process used by the Nichii Gakkan Co (9792 JP) board and special committee was lax, and lacked the protections for MAJORITY shareholders (because indeed, while minorities do not control the board, they are, in fact, a majority of shares out). The lack of majority-of-minority protection in this case is quite disappointing, but it was more the lack of actual process protection overall which was problematic. Under the current legal and guidance framework, good process can explain why such protections are missing, even if it does not do so with much backing. Here, adherence to good governance process was simply lacking. 

My last insight on the deal Thinking Through Nichii Gakkan Tender Strategy was published on the last trading day before the Tender Offer was scheduled to expire, when the shares were trading 10+% through terms at ¥1675/share. At the time, my conclusion was as follows: 

…I still think that it is VERY easy to explain, economically-speaking, a 20% bump. And a 10% bump is a walk in the park, both economically and in terms of face.

Based on my own “probability matrix”, I expect a Tender Offer Extension and Bump to ¥1690-1750 Tender Offer is my “Median Estimated Near-Term Outcome.”

[and…]

I am skeptical that the family and Bain walk away on Monday.

The NEW News

Bain on Friday after the close filed an amendment to the Tender Offer Registration Statement which included both an extension of the end date of the Tender Offer and an increase in the Tender Offer Price by 11.3% to ¥1670/share. 

But what it did was sneaky.

Bain increased the likelihood of Tender Offer success both because the new price is higher than the price at which the stock was trading AND because it seems to have invited the largest non-affiliated shareholder Effissimo Capital Management (at 12.64% of voting rights) to join the bidder group on condition the tender offer is successful. 

The Special Committee appears not to have opined, but the Board of Directors (which is a majority of insiders and buyer representatives) has now reiterated its recommendation that all shareholders should tender. 

The lack of self-awareness here is striking. 

Since the Tender Offer was announced…

  • The general perception in both the domestic and international media appears that this whole deal has been mis-represented by the buyers (and management), and the pricing and timing has been opportunistic.
  • The immediately visible public shareholder reaction was that the price was too low. The shares traded through terms and never traded below. The reaction by the Board/Management/Bain was that no increase in shareholder price was needed though 27.5mm shares have changed hands above the original Tender Offer Price. 
  • The later-visible public shareholder reaction was a response by a shareholder who wrote public letters to the members of the Board of Directors with detailed analysis of the problems with the process and the pricing. I have seen no indication that the Board has responded to that shareholder. 
  • The latest-visible public shareholder reaction is by Effissimo Capital Management, who when asked by the Tender Offeror at the original price, rejected the idea of tendering their shares.And after the Tender Offer Price was raised they STILL rejected the idea of selling their shares. Effissimo has undertaken to tender their shares, in fact, but they have done so with the explicit side agreement they will be able to reinvest some or all of the proceeds in the acquiring company. Effissimo are, in effect, not selling their shares. 
  • The explanation about Effissimo’s business that the Board included in their document supporting the change in terms and recommending other investors tender their shares says

エフィッシモは、基本的に、中長期的な企業価値の向上に伴う株価の値上がり益や配当が見込まれ、企業価値に比べ割安である株式に対して投資を行っております。

Fundamentally, Effissimo invests in stocks which are cheap to their underlying value based on the gains expected in stock price and dividends due to improvements in corporate value over the medium-to-long-term. 

The biggest investor out there, and the only public noise out there, are uniformly telling the world that the price is too cheap. LIM has not yet publicly opined on the updated Tender Offer Price but I cannot imagine that they are satisfied. And the fact that the Board has recommended a deal which is to the advantage of one public shareholder and not others without any deliberation by the Special Committee is telling, but not surprising.

The biggest independent shareholder in the stock for the last few years is telling everyone publicly that they think the new Tender Offer Price is a buy for the medium-to-long term. They are telling you that general shareholders are NOT getting paid for fair value + an appropriate portion of synergies in the Tender Offer Price. And they are showing you that only by giving special privileges to one of those minority shareholders will they get this deal done, bulldozing it past remaining minorities.

That deserves some shareholder consideration. More analyst consideration is below the fold.


Haier Electronics’ Privatisation Bid from Haier Smart Home

By Arun George

After market close on Friday, Haier Electronics Group Co (1169 HK)/HEG announced a pre-conditional privatisation offer by way of a scheme of arrangement from Qingdao Haier Co Ltd A (600690 CH)/HSH. The offeror will offer 1.60 new HSH H shares and a HK$1.95 cash payment per scheme share. In connection with the privatisation proposal, HSH is seeking a listing of the HSH H shares by way of introduction on the Main Board of the HKEX. Based on the independent valuer’s HSH H shares value range of RMB16.45-16.90 (HK$18.23-18.72), the privatisation proposal values each scheme share at a theoretical mid-point of HK$31.51. At this theoretical mid-point, the bid represents a premium of 44.20% over the closing price of HK$21.85 per share on the last trading day (12 December 2019). 

As the share exchange accounts for the majority of the consideration (around 94%), the attractiveness of the proposal hinges on the robustness of the HSH H share valuation. On the assumption that the HSH H shares value range is reasonable and fair, the privatisation proposal is attractive for scheme shareholders due to several factors. 

However, the independent valuer’s HSH H shares value range looks generous. The valuation range was based on three methodologies, all of which have issues in our view. While the independent valuer’s HSH H shares value range is flawed, on balance, we think that the privatisation proposal will likely succeed due to HEG’s shareholder register. 


Asian SaaS Stars: Opportunities, Market Outperformance, & Key Challenges

By Douglas Kim

The Asian Software-as-a-Service (SaaS) is a highly fragmented sector filled with numerous innovative companies. Thousands of companies compete in the Asian SaaS sector. In this insight, we have included 105 companies, including 56 public companies and 49 private companies in Asia. 

The 56 public companies have a total market cap of $367.2 billion won. The top 10 companies in this list have a total market cap of $298.1 billion won. Among the top-ranked companies, those from India and Australia stand out. India and Australian companies accounted for 8 out of 10 top-ranked companies in this list. We have provided the rankings of these companies on their market cap basis. We have included 6 major countries/regions in Asia including Japan, China, Australia, India, Korea, and Southeast Asia (Singapore, Malaysia, and Thailand).

Keep in mind that although these 56 public companies all provide some sorts of SaaS related products and services, not all of them have a 100% SaaS business model. Rather, for most of these software-related companies, SaaS is becoming a greater portion of their incoming revenues. Among all the public companies, Atlassian Corp (TEAM US) (Australia) is probably the biggest pure-play SaaS company right now with a market cap of US$42.7 billion. The 49 private companies that we have included in this insight tend to be smaller companies but they tend to be more pure-play SaaS providers.

SaaS is becoming more important in companies, our homes, and in our lives due to the accelerating evolution of technology in terms of greater adoption of cloud-based services, smartphones, AI, Big Data, IoT, and increasing programming sophistication that reduces the need for human, manual labor. Adam Smith would be very proud of SaaS today, as massive amounts of global venture capital and start-up funding have tried to accelerate promising SaaS companies as the global competition has forced the very best companies to sprout in this highly competitive market.

In Asia, some of the best companies in the SaaS segment include Atlassian (Australia), After Pay (Australia), Xero (Australia), One Connect (China), Kingdee (China), Kingsoft (China), Douzone Bizon (Korea), Freee KK (Japan), and Rakus (Japan).

The main purpose of this report is as follows:

  • Identify the major players (both public & private) in the highly fragmented SaaS sector in Asia
  • Specify the key trends driving the Asian SaaS industry
  • Provide an initial overview of the key companies in the Asian SaaS industry
  • Highlight the main risks of this industry

Before it’s here, it’s on Smartkarma

Most Read: FamilyMart Co Ltd, Jardine Matheson Holdings, Li Auto Inc., Haier Electronics Group Co, and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu
  • StubWorld: Would Jardines Move Back To HK?
  • Li Auto (理想汽车) Trading Update – No Mention of Hillhouse’s Investment
  • Haier (1169 HK): Avatar Scrip Offer From Parent
  • Asia Short Interest Weekly: Alibaba, JD, Wharf, SMIC, JPX, Itochu, Canon, Kyushu, Shinpoong, Seegene

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

By Michael Causton

Itochu’s plans for Familymart are about a lot more than control – it has had effective control for years anyway.

There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. 

Japan’s biggest trading companies, particularly Itochu Corp (8001 JP) and Mitsubishi Corp (8058 JP), have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. 

Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan’s biggest food-based retailers.

Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.

Absorbing Familymart is the basis for a much bigger consolidation of Itochu’s interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.

Sadly, current Familymart shareholders won’t benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.

In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.

Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.

For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.

CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.

In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.


StubWorld: Would Jardines Move Back To HK?

By David Blennerhassett

This week in StubWorld …

Jardine Matheson Holdings (JM SP) is trading “cheap” at a 32% discount to NAV, adjusting for cross-holding. Jardine Strategic Holdings (JS SP) is even wide at 51% discount to NAV, also adjusting for cross-holdings. Is the time ripe for the Keswicks to collapse the structure? Would a move back to Hong Kong help narrow the discount?

Jardine Cycle & Carriage (JCNC SP) was trading cheap on a NAV and stub basis this time last month (StubWorld: Matheson Buybacks As Ratio Mean Reverts; JCNC Looking Cheap). It is now even cheaper. Time for a JCNC breakout.

Preceding my comments on Jardines, are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.



Haier (1169 HK): Avatar Scrip Offer From Parent

By David Blennerhassett

Haier Electronics Group Co (1169 HK) (HEG) was briefly suspended pursuant to the Takeovers Code on the 19 December 2019, which was followed by a press release from Haier’s parent Haier Smart Home (600690 CH) (HSH) that it was contemplating taking Haier private with newly issued Hong Kong shares, implying HSH was seeking an H-share listing, either first, or concurrent with the share swap.

Then crickets.

The Announcement

This past Friday evening, HEG announced a pre-conditional Scheme such that HEG shareholder will receive 1.6 new HSH H shares plus HK$1.95 in cash. 

An independent valuer places a fair value for the (as yet unlisted) H shares between RMB16.45-RMB16.90/share. This backs out an indicative value under the Scheme of HK$31.11-HK$31.90 – or $31.51 at the mid-point, against HEG’s last close of HK$26.85; but a 44.20% premium to the price at the time of the 2019 December suspension. Plus an all-time high. The cash/equity split is 6.2%/93.8%. The A-shares closed last Wednesday (the day before shares were halted) at RMB 18.00, which would be closer to HK$33.95 (including the $1.95 in cash).

The pre-conditions concern CSRC approval with respect to the issuance of the H shares and approval by two-thirds of HSH’s shareholders to approve the resolutions.

And then there are the exchangeable bonds to take into account.

More below the fold.


Asia Short Interest Weekly: Alibaba, JD, Wharf, SMIC, JPX, Itochu, Canon, Kyushu, Shinpoong, Seegene

By Brian Freitas

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.

Hong Kong saw shorts rise on Alibaba Group (9988 HK), Sino Biopharmaceutical (1177 HK), Sunac China Holdings (1918 HK) and JD.com (HK) (9618 HK) while there was short covering on Wharf Real Estate Investment (1997 HK), Ping An Insurance (H) (2318 HK), Semiconductor Manufacturing (981 HK) and Wharf Holdings (4 HK). Shorts increased in Health Care and Consumer Discretionary, and were covered in Real Estate, Information Technology, Financials and Communication Services.

Japan saw an increase in shorts on Japan Exchange Group (8697 JP), Itochu Corp (8001 JP), Fast Retailing (9983 JP) and Lasertec Corp (6920 JP) and a reduction in shorts on Canon Inc (7751 JP), Kyushu Railway Company (9142 JP), Inpex Corp (1605 JP) and Otsuka Corp (4768 JP). Sectorally, shorts increased on Financials, Health Care and Industrials, and reduced on Energy and Information Technology.

Short Interest in Korea decreased in almost all industry groups led by Pharmaceuticals, Media & Entertainment and Automobiles. Stocks that saw the most short covering were NCSOFT Corp (036570 KS), Shinpoong Pharmaceutical (019170 KS), Samsung Electronics (005930 KS), Korean Air Lines (003490 KS) and Seegene Inc (096530 KS).

Short Interest in Taiwan decreased in Technology Hardware, Materials and Capital Goods, while shorts increased in Semiconductors. Stocks that saw the highest increase in shorts were Macronix International (2337 TT), TSMC (2330 TT), Elan Microelectronics (2458 TT) and Quanta Computer (2382 TT) while shorts were covered in Hon Hai Precision Industry (2317 TT), Yageo Corporation (2327 TT), Wiwynn Corp (6669 TT) and Asia Cement (1102 TT)


Before it’s here, it’s on Smartkarma